Aren't There Limitations? Aren't there limits to this nutty borrowing? Yes, of course. The home loan industry caps refinancing of any kind to 75% of the value of a home. That said, 75% is a pretty wide range for someone to get into trouble with financially, especially when prices were going through the roof on imaginary home values. Home equity loans had the same kind of limitations in borrower, however they were a bit higher. Industry standards capped equity loans at 85% of appraised value of a home. Remember, if the valuation is based on appraised value, that's basically driven by market forces. So if a home seems to be worth $500,000 in potential sales, then a home equity loan could in theory be generated for more than the home was worth originally at $200,000. So much for practical limits. As a result, it's no surprise now that the market has serious crashed, that many folks who are stuck with equity loans, also known as second mortgages, are now looking around to somehow lower the costs of this borrowing to pay it off faster. Why? Remember, if a home value falls below its mortgage balance owed, it's under water. If it also has an equity loan on top of the primary mortgage, then the difference needed to get above water is that much more. For someone try to sell a home in such a scenario, it's not going to happen unless the bank agrees to a short sale (selling the home for less than what is owed on it). Opportunities, Benefits and Reasons to Refinance Refinancing equity loans involve generally the same process as refinancing a first mortgage or loan. The borrower is trying to get approval of a new loan to then use it to pay off the existing loan. The advantage, if possible, is to try to either reduce the interest charge on the financing or to reduce the time period of payment, or both. Both have the effect of ultimately paying less over time than dealing with the existing equity loan. Opportunities, Benefits and Reasons to Refinance Clearly, a falling interest rate on the loan market can drive many to consider refinancing. When you're dealing with a loan of $20,000 to $50,000 even a drop of one interest point can generate both cash flow monthly savings for the borrower as well as overall loan savings in total. That said, there are offsetting costs. Many refinancing processes involve charges. These include closing fees, appraisal fees, loan generation fees, title fees, and insurance fees. So while for the life of a loan the monthly payments may end up being lower, it could take up to two years before the cost of the loan fees are recovered in true savings. So, taking into account fees involved, refinancing equity loans results in two main benefits for most borrowers: for those finding themselves financially pinched lowering monthly bill costs can be a blessing; the second reason, as mentioned before, is to pay less in interest to a lender and more in principle to get rid of the loan altogether. Limitations of home equity loans, reasons to consider refinancing Home Limitations Benefits & Drawbacks Beware of Scams Privacy Policy